Fed delay puts pressure on Reserve
The US central bank's move shocked financial markets, which expected a modest reduction of up to $US10 billion in its monthly $US85 billion quantitative easing program. It sparked a global rally, pushing US stocks to record highs and bringing relief to embattled emerging markets hit by fleeing foreign capital.
The Australian benchmark S&P/ASX 200 Index closed 1.1 per cent higher at a new five-year high of 5295.5. The broader All Ordinaries gained 58.2 points to finish at 5288.6.
The Australian dollar gained 1.5 per cent to trade above US95¢, a level not seen since mid-June, after the Fed's statement sent the US currency into a tailspin. The dollar was buying US95.16¢ late Thursday.
Currency strategists said the Australian dollar could maintain its recent gains, pointing to December as the next possible time the Fed could consider tapering its quantitative easing program.
The highly accommodative monetary policy stance and lack of a clear timetable for its stimulus reduction plans meant the Fed had "arguably removed the most bullish prop for the US dollar", Westpac's chief currency strategist Robert Rennie said.
"We see risks of a continued weakening of the US dollar and that's clearly something that's going to be supportive of the Aussie in the short term."
The strengthening dollar is a headache for the RBA, which has sought a weaker currency to support the Australian economy as it rebalances away from mining-led growth.
The currency was mostly trading above parity with the US dollar in the past two years. It fell to a low of US89.01¢ this year in August from a high of US105.98¢ in January, but recently regained some of its value.
"I wouldn't be surprised if we ended up being US97¢ to US98¢ against the US dollar [in the short term]," Citi currency strategist Todd Elmer said, adding the Reserve Bank was likely to become more active if the Australian dollar continues to appreciate.
He said investors were likely to exercise caution in returning to risk assets such as the Australian dollar, as the RBA had made clear its displeasure at the currency's high level and could use further interest rate cuts as a tool to bring it down.
JP Morgan economist Tom Kennedy said the strength of the Australian dollar, combined with the expected rise of the jobless rate to 6 per cent by the end of the year, could create a conducive environment for further monetary easing.
"It [the $] has stuck at this stubbornly high level, and if it's US95¢ over the next couple of [RBA] meetings, it's definitely going to be playing on the RBA's mind and is something that could potentially get them over the line."
Financial markets were pricing in a 4 per cent chance of a rate cut by the RBA in October and a 25.3 per cent chance of a cut in November, a slight rise from 23.2 per cent on Wednesday.
A key driver of the Fed's decision to stay its hand was soaring long-term US government bond yields. Fed chairman Ben Bernanke said that any stimulus reduction decision would be driven by signs of sustained growth in the US economy.
Confusion reigns— Page 29
Frequently Asked Questions about this Article…
The Federal Reserve surprised markets by delaying cuts to its monthly US$85 billion quantitative easing program when many expected a modest reduction of up to US$10 billion. The Fed cited soaring long-term US government bond yields as a key factor, and Fed chairman Ben Bernanke said any stimulus reduction would depend on signs of sustained US economic growth. The surprise decision sparked a global rally in stocks and currencies.
The Fed’s decision sent the US dollar lower and pushed the Australian dollar higher — the AUD jumped about 1.5% to trade above US95¢, reaching roughly US95.16¢ late on Thursday. Currency strategists said the move could support further short-term AUD gains, with some pointing to December as the next possible time the Fed might consider tapering QE.
Australian equities rallied: the S&P/ASX 200 Index closed 1.1% higher at a new five-year high of 5,295.5, while the broader All Ordinaries rose 58.2 points to finish at 5,288.6. The global risk-on move helped lift US stocks to record highs and provided relief to emerging markets.
The RBA prefers a weaker currency to support Australia’s economic rebalancing away from mining-led growth. A stronger AUD reduces competitiveness for exporters and could complicate the RBA’s efforts to stimulate domestic demand, so the bank may become more active if the currency keeps appreciating.
The article says a stronger AUD could make the RBA consider policy action. Citi’s currency strategist Todd Elmer suggested the RBA would likely become more active if the AUD continues to appreciate, and JPMorgan economist Tom Kennedy noted that a strong AUD combined with a rising jobless rate could create conditions for further monetary easing. Financial markets were pricing a small chance of an October rate cut (4%) and a larger chance in November (25.3%).
Citi currency strategist Todd Elmer said he wouldn’t be surprised to see the Australian dollar around US97¢–US98¢ in the short term. Westpac’s Robert Rennie also noted the Fed’s stance had removed a major bullish support for the US dollar, which could be supportive of the AUD in the near term.
Soaring long-term US Treasury yields were a key driver behind the Fed’s decision to delay tapering its stimulus. Fed chairman Ben Bernanke stressed that any reduction in stimulus would be driven by evidence of sustained US growth. For investors, moves in long-term bond yields can materially affect central bank policy expectations and market volatility, influencing both currency and equity markets.
The Fed’s surprise delay sparked a global risk-on rally that lifted equities and provided relief to emerging markets, while boosting the Australian dollar. Everyday investors should note that central bank signals, bond yields and currency moves can quickly change market sentiment. The article also highlights that central banks (like the RBA) may react if currency moves become a policy concern, which can affect interest rate expectations and asset prices.
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